Germany Digs Its Heels in

Germany's ruling grand coalition may be breaking apart more than a year ahead of the general election but, in the key EU policy area of energy and climate change, the collective Berlin government is digging its heels in. So much so that there's talk here of Europe's biggest country running the show.

Chancellor Angela Merkel's government is exploiting the tight schedules imposed on the EU by the entry into force, probably in January, of the Lisbon reform treaty and European parliament elections in June next year to block agreement, except on its terms, on proposals to break up energy groups and to impose tougher CO2 emission limits on all new cars.

These two proposals, cornerstones of the Barroso commission's agenda to liberalise markets and combat global warming, have to be agreed by early next year at the very latest if they are not to fall by the wayside - and have to be re-presented from scratch by the next commission.

On energy, German opposition has effectively killed stone dead the commission scheme to force integrated groups to sell off their gas and electricity transmission networks or grids - "ownership unbundling" in Brussels jargon. This is or was seen as vital to promoting consumer choice and, hopefully, lower prices by encouraging new entrants to national markets. The argument in favor is that the integrated groups prevent this by controlling, if not manipulating, access to the grid.

People close to Barroso now admit this scheme, favored by a growing majority of the EU's 27 member states, is kaput. "There was always going to have to be a compromise if we were to get this through," they say, "and that's why we put forward an alternative version and the outcome will center around this."

This was to allow the integrated groups to retain ownership of their grids but hand over their management, including investment decisions, to an independent systems operator. The Germans and their French allies, backed by six others, found even that unpalatable and proposed a watered-down version. This, according to those in the know, has been further diluted so control of a legally separate grid company would be exercised by a trustee and/or compliance officer. ("Probably based in New York and as far away from real market conditions as possible," one exasperated EU official said.)

So far, MEPs, exercising their co-decision rights, have backed full ownership unbundling and Eluned Morgan, a labor MEP and rapporteur for the European Parliament's energy committee, insists the "blocking minority" has dwindled to six. "The problem is that the Germans are still digging in their heels," she says.

She adds: "I don't understand the logic. Germany's biggest group, E.On, has said it will divest its grid (10,000km long) which means the French could get into their market but they won't be able to get into France's market." She thinks Slovenia, the current holder of the EU presidency, will table a German-style compromise on June 6 when energy ministers next meet - and get a furious reaction.

Even so, she admits, time is on the Germans' side. The French, whose own integrated groups such as EDF and GDF have resisted unbundling, take over the EU presidency on July 1 and don't want the issue on the table for their six months in office. The outcome, she fears, could be no deal at all - and regulatory uncertainty afflicting investment needs set at €1tn (£793bn) over the next 20 years.

Ironically, the German stance is at complete loggerheads with the demands from German consumers - industrial as well as domestic - for action to stem soaring gas and electricity prices. Several of Germany's most energy-intensive firms have been lobbying MEPs to stand firm. But it seems a lost cause.

A steep curve

German car-makers, however, seem to be calling the shots on the other key policy proposal with strong backing from Merkel - and Günter Verheugen, the EU industry commissioner. A highly contentious report by Greenpeace this week accused Volkswagen, BMW and Mercedes of successfully watering down - through heavy lobbying - commission proposals to limit emissions from all new cars to 120 grams a kilometer from 2012.

The real bone of contention is how to measure average CO2 reductions across an entire fleet. The commission originally wanted this done by a car's size or footprint but opted - "for simplicity reasons" - for weight instead. But its still complicated proposal involves setting a "slope of the curve" for assessing this: the steeper the curve between weight and CO2, the better or less onerous for the more powerful models produced by the Germans.

The Germans pressed for this curve to be set at 85 to 90% while the French and Italians, who produce smaller cars, wanted it at 20 to 30%. Merkel and French president Nicolas Sarkozy, realising the dispute was so bitter, set up a joint working party to resolve it; with no success at all, according to insiders.

The commission, desperate to get its proposal through, has suggested that the curve be set at 60% and, in another move to placate the Germans, is ready to see the planned fines that would be imposed on companies failing to meet the targets reduced or tapered in more gradually. It rejects suggestions it has caved into German pressure.

But French and Italian executives and ministers insist that it has. Sergio Marchionne, Fiat chief, who was constrained from speaking out when he headed the pan-European industry lobby, ACEA, has said that the latest EU plan "beggars common sense" and results from political pressures. Peugeot-Citroën, whose chief executive Christian Streiff now heads ACEA, also opposes the commission's formula.

The issue comes to a head on June 5 when environment ministers discuss the commission's entire climate change package, with sources saying there is unlikely to be any political agreement - except perhaps to reduce the proposed fines and adopt the parliament's timetable for postponing the target date for the new emission limits until 2015.

"There are no winners or losers - so far," the sources say. But, as ever in EU politics, the outcome will only be decided at the last minute. Probably with what the Germans call "Elf-meter Schiessen" or penalty shoot-out. And, as we know, they are European champions at that ...